Surging domestic demand helped manufacturing growth in China and Russia pick up speed in August, while U.S. manufacturing grew faster than expected, but data showed the recovery slowing in European factories.

Purchasing managers' indexes, which measure changes in business activity across thousands of private sector companies, showed diverging fortunes among euro zone manufacturers, which expanded overall at their slowest pace since February.

Equivalent figures from the United States showed the manufacturing sector chalked up a 13th straight month of expansion, helping to calm fears that economic growth was stagnating, and offering hope of new jobs in that sector.

The manufacturing rebound in China and stronger-than-expected U.S. factory data spurred a jump in stock and commodities prices worldwide on Wednesday, helping start the month on a bright note after a gloomy August.

Government debt prices extended losses, with the price of benchmark 10-year U.S. Treasury notes and German Bund futures shedding more than a full point, after the U.S. manufacturing data. Major stock indexes around the world rallied more than 2 percent.

The U.S. dollar rose against the yen but fell against the euro as fears of a global slowdown receded and investors poured into riskier currencies. The Australian dollar rallied 2 percent against the greenback after data showed Australia's economy grew at its fastest pace in three years last quarter.

In mid-morning trading, the ICE Futures U.S. dollars index, which tracks the greenback against a basket of six currencies, had fallen 1 percent to 82.403 <.DXY>.

ASIA LEADS THE RECOVERY

A pair of China's manufacturing surveys showed activity picked up last month, recovering from a government-engineered slowdown designed to calm an overheating economy.

Indian factories expanded apace in August, although slightly slower than in July, after Asia's third-largest economy grew at its fastest rate in nearly three years in the last quarter.

And the manufacturing sector of Russia -- part of the BRIC quartet of new economic powers alongside China, India and Brazil -- expanded at its fastest rate in 28 months largely thanks to the strong domestic demand.

HSBC's purchasing managers' index (PMI) for China rose to a three-month high of 51.9 in August from 49.4 in July, while the official index also rose, to 51.7 from 51.2.

Optimism that Beijing was succeeding in shifting towards more domestic-driven sustained growth after a credit-fuelled spurt early this year helped lift Asian stocks and metals markets largely dependent on demand from China.

We expect China will have a relatively moderate slowdown over the second half of 2010, but weaker external demand from the United States and Europe still represent a significant downside risk in coming months, said Brian Jackson of Royal Bank of Canada in Hong Kong.

China's ever-growing influence showed up in Australia which, grew 1.2 percent in the second quarter, beating market forecasts largely due to the voracious appetite in China and India for Australia's resource riches, from coal to wheat.

U.S. FACTORY ACTIVITY RISES

The U.S. Institute for Supply Management said its index of national factory activity rose to 56.3 from 55.5 in July. That was above financial market expectations for 53.0. A reading above 50 indicates expansion in the sector.

Last month, second quarter 2010 U.S. gross domestic product data showed the economic recovery slowing as the boost from an $814 billion (526 billion pounds) government stimulus package and the rebuilding of inventories by businesses faded.

Manufacturing, which has been leading the U.S. recovery, is still showing some strength and has expanded every month since August 2009. The ISM's employment index rose to 60.4, from 58.6, beating expectations.

It doesn't give us an idea of how many jobs that's creating, but it does give us certainly an indication of some strength in continued optimism among manufacturers, said Norbert J. Ore, chairman of the ISM's survey committee.

We lost a lot of jobs in the manufacturing sector and replacing them is very slow, Ore added.

High unemployment is a major factor in negative U.S. poll numbers for Democrats ahead of November's mid-term elections.

MIXED EUROPEAN PICTURE

The Markit Eurozone Manufacturing PMI for August dropped to 55.1 from 56.7 in July, marking its 11th month above the 50.0 mark, which divides growth from contraction.

Manufacturing growth in Germany slowed in August, although other recent data show Europe's biggest economy is expanding fast. Business in France accelerated but Italy and Spain saw their manufacturing indexes slip backwards.

We are at a delicate juncture of the global business cycle. Globally, there is a slowdown in the trade cycle which first affects the economies which are reliant on that, said Silvio Peruzzo at RBS.

Just as they were benefiting from the acceleration in Q4 2009 and Q1 2010, they will now be subject to the downturn and this will amplify the divergence we are seeing.

Britain, a major euro zone trading partner, saw growth in its manufacturing sector slow more than expected last month, led by the weakest expansion in new orders for more than a year.

(Additional reporting by Yoo Choonsik in Seoul, Wayne Cole in Sydney, Lidia Kelly in Moscow and Yati Himatsingka in Bangalore, Steve Johnson in New York; editing by Todd Eastham)

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